High prices, lower demand and liquidity issues may pull house prices lower in Mumbai, while lack of new launches will likely push the prices higher in Gurgaon, said Bank of America Merill Lynch in a research report.

Property prices in Mumbai have appreciated 14 percent (CAGR) in the last decade and the most affordable project within Mumbai is upwards of Rs 10,000 a square foot, according to the report. This means for a 2BHK apartment, the price will be at least Rs 1.5 crore.

“This trend is unsustainable and prices in Mumbai will have to correct and remain subdued over next 2-3 years. This will allow improvement in affordability as income levels catch up with residential prices,” said Abhishek Kiran Gupta, real estate analyst at Bank of America Merrill Lynch.

Unable to sell homes at current market prices, builders are now offering smaller cheaper homes to lure buyers. While no builder has officially cut base prices as yet, several discount schemes and freebies are on offer. For example, several Mumbai-based builders are offering
discounts through 20:80 schemes, stamp duty waivers, floor rise waivers and
other freebies to attract buyers. The 20:80 model is where the buyer pays up to 20 percent of the entire amount as advance, while the rest is paid only when the flat is ready.

Most new launches in the first quarter have been at a discount to the average market prices. Projects announced by L&T and Lodha witnessed robust sales in 1QCY13 due to this strategy. While Lodha was able to attract a new group of first-time buyers to the south Mumbai market because of the smaller-sized apartments on offer in their new Lower Parel project that brought down the ticket size significantly, in suburban Mumbai, Chaubey Realties is offering compact 1-bedroom units of 639 sq ft to attract customers.

“If you look at the secondary market, price correction has already taken place as resale apartments are being offered at at least 15-20 percent below the market price,” said Pankaj Kapoor, MD at real estate firm Liases Foras.

“In Mumbai, an 18-month approval hiatus halted the launch of new developments, restricting supply. However, now with more supply scheduled and a slow financial sector (and consequently slow commercial absorption), prices are expected to correct,” said another report by Kotak Institutional Equities.

Gurgaon, on the other hand, is in a catch 22 situation with no new launches but high prices as land supply is constrained. Absorption rate in Gurgaon is slowing but is still the highest in the country among tier I cities as it is a highly speculative market. “Avg. pricing in 1Q rose by 4.5% across Gurgaon projects. This trend of relentless rise in prices could prove a dampener in the future,” said Gupta.

“In Gurgaon, prices increased as there was no new construction for a year. The blended average ticket size of units here crossed that of Bangalore and Pune, which are much larger commercial, industrial and residential markets” said the Kotak report too.